Feds claim Stamford trader tricked TARP-backed funds

Rob Varnon

Published 10:37 pm, Monday, January 28, 2013

A former Stamford-based managing director at an investment bank pleaded not guilty Monday morning to criminal charges of profiteering on a federal bailout program and multiple allegations of securities fraud.

Jesse Litvak, 38, who worked for Jefferies in Stamford, was arrested Friday at his New York City home and was released Monday after pleading not guilty of 16 charges at the U.S. District Court in Bridgeport. Litvak is also facing civil charges filed against him by the U.S. Securities and Exchange commission. Jefferies has not been charged and Litvak's employment with the firm ended in December of 2011. Officials, when asked if there were others involved, declined to comment as this is an ongoing investigation.

According to the indictment and civil complaint, between 2009 and 2011 Litvak was working in Jefferies' Stamford operation trading in mortgage-backed securities, which are pools of bonds used to back mortgages and typically pay the holder a percentage of the interest and principals being paid on the actual mortgage. This class of asset was a trigger to the housing and financial crash of 2008. Many financial firms sliced up portions of mortgages, including subprime ones, and made money by buying and selling them as low risk investments. But when people started defaulting on loans and foreclosures spiked, the RMBS market became toxic.

Federal officials allege that Litvak relied on several tricks to increase the price of the securities when reselling them, including lying about what Jefferies paid for them and even making up fictional sellers in deals that included government-backed funds.

The SEC, in a statement on Monday, said when his fees and the premiums are added up, the alleged fraud cost Jefferies' customers $2.7 million.

"Jesse Litvak did not cheat anyone out of a dime," Smith wrote in an email. "In fact, most of these trades turned out to be hugely profitable. These were principal transactions between sophisticated market participants. Jesse looks forward to the trial in this case so that his name can be cleared and he can get on with his career."

Litvak is the first person charged under a federal law passed in 2009 that was meant to protect the Toxic Asset Relief Program, a $700 billion bailout program authorized in 2008 to help banks get out from under toxic mortgage assets. A law was passed in 2009 making it illegal to profit from TARP through fraudulent means.

Litvak allegedly sold mortgage-backed securities to several public-private funds that received money from TARP.

"Illegally profiting from a federal program is reprehensible," David Fine, U.S. attorney for the District of Connecticut, said during a conference call with reporters.

The SEC said that because there is no regulated market for RMBS, investors have to rely on the truthfulness of brokers like Litvak.

"When you speak, you have to speak truthfully," George Canellos, SEC's enforcement division deputy director on the call. "Mr. Litvak violated that tenant brazenly to line his pockets and his firm's pockets. ... His lies concerned the market -- the cost and price and what other investors were doing or not doing. They were unfit for a used car lot."